ROLLS Royce is in talks with workers over how to tackle a é1.1bn shortfall in its pension fund.

The news came as the engine-maker, which has a manufacturing base in Crewe, announced a 53 per cent fall in underlying pre-tax profits to é255 million.

"We are consulting with our employees with the objective of limiting the financial impact of the current pension fund deficit within the guidance we provided last August,é said chief executive Sir John Rose.

The economic slowdown, which has been particularly harsh on the manufacturing sector, led to a falling demand for civil aircraft engines while the companyés pension fund was hit by falling stock markets.

But the company remained upbeat today (Tuesday), saying it expected to return to growth in 2003 and had clocked up record-level year-end orders of é16.2bn. Rolls Royce added that its was beginning to benefit from its restructuring programme, which had led to the loss of 5,000 jobs in October 2001,

éWith the help of our workforce we have successfully implemented the restructuring programme and have achieved a strong operational performance with significant improvements in working capital management,é said Mr Rose.

"This performance, together with our record year-end order book and growing aftermarket revenues, confirms our business model and our ability to manage uncertainty and deliver shareholder value.

éSubject to the continuing uncertainty caused by the situation over Iraq, we are reiterating our guidance for profit growth in 2003, with positive cash flow."